Fixed mortgage deals vs variable mortgage deals

Which one is better? A fixed mortgage deal or a variable mortgage deal?

According to a new study from the Post Office, a staggering 28% of us are unsure of what rate of interest we are paying on our mortgage.

That equates to around three million of you who are completely in the dark about the most important thing that determines how much you end up forking out for your home.

Remember, even a tiny drop in the rate now could save you thousands and thousands of pounds over the lifetime of your mortgage.

The SVR problem

If you are signed up to a long-term fixed rate, and don’t need to worry about remortgaging for a good few years, then this is not such a big problem, so long as you remind yourself of what you are paying once you come to the end of your deal.

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However, plenty of people are not in such a great position, which is why I find their ignorance staggering.

And one particular area of concern, in my opinion, are standard variable rates (SVR). These are the rates you move to once the initial promotional period of your mortgage comes to an end – so for example, if you’re on a two-year fixed rate, at the end of the first two years you will move onto the lender’s SVR.

The trouble is that the SVR charged by each lender can vary enormously. While the average SVR is 4.79%, one lender currently charges a whopping 12.55%! Lenders can also move them up or down whenever they like, irrespective of what’s happening with Bank Base Rate, so you really need to keep on your toes if you are on an SVR.

This is clearly an area where lenders have the potential to make some serious money out of us, so if you are currently stuck on the SVR, or about to move to it, then now is a great time to consider the option of remortgaging elsewhere.

Going for a fixed rate

I am a complete broken record on this, but I maintain that the best product to go for at the moment is a fixed rate. Yes, trackers look cheap currently, and likely will be for a while, but when you come to remortgage who knows how high interest rates will be – and how expensive fixed rate deals will be?

Plus, fixed rates are currently looking seriously cheap on a historical basis, so I reckon now is the time to take advantage.

If you only want to fix for a couple of years before shopping around for a new deal, here are some of the best short-term fixed rates:

Lender	Term	Rate	LTV	Fee	Early Repayment Charge
Alliance & Leicester	Fixed until 31/5/12	2.89%	70%	2%	Early repayment charge in the first two years of 3% of the sum repaid, on top of admin fee of £295.
Yorkshire BS	Fixed until 31/3/12	3.09%	60%	£1195	3% of the sum repaid on top of £90 fee.
Britannia	Fixed until 30/6/12	3.19%	75%	£999	2%/1% redemption fee of outstanding balance.
First Direct	Fixed for two years	3.29%	75%	£998	3%/2% redemption fee of outstanding balance.
Ipswich BS	Fixed until 30/4/12	3.99%	80%	£1049	3% of the mortgage advance

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However, personally I much prefer a long-term fixed rate. With rates at historic lows, I reckon it makes sense to take advantage of them for as long as possible. So below I’ve put together my favourite deals of at least five years in length:

Lender	Term	Rate	LTV	Fee	Early repayment charge
HSBC	Fixed until 30/4/15	4.64%	60%	£999	Early repayment charge of 5%/4%/3%/2%/1% of the sum repaid.
Chelsea BS	Fixed until 28/2/15	4.69%	75%	£995	Early repayment charge of 4% of the sum repaid
Leeds BS	Fixed until 30/4/15	4.85%	80%	£999 if mortgage is less than £500,000. If more than this figure, £199 plus 1% of the mortgage advance.	5%/5%/4%/3%/2%
Britannia BS	Fixed until 30/6/2020	5.29%	75%	£999	Redemption charge of 6/6/6/6/6/6/5/4/3/2% of outstanding balance
Skipton BS	Fixed until 28/2/17	6.99%	85%	£995	Redemption charge of 5/4/3/3/3/2/2% of the outstanding balance

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Gambling on a variable

However, there is something to be said for opting for a variable mortgage.

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With Bank Base Rate rooted at a record low, variable rates look unbelievably low, and with a number of economists predicting they will remain at 0.5% for a while before rising very slowly, plenty of borrowers are happy to take a gamble with them.

A great benefit of variable deals at the moment is that, because they are so cheap and you payments will be so low, overpaying on them will allow you build up equity in your property much quicker, which will then help you when the time comes to remortgage as you will have a greater choice of cheaper deals.

This week saw the relaunch of HSBC’s incredible 1.99% discount mortgage. The rate is simply unbelievable, and the fact that the lender has cut the fee by £200 to £999 is also welcome. However, remember it is a discount mortgage and not a traditional tracker. This means it is linked to HSBC’s SVR, and not Bank Base Rate, so could go up at any time. Plus you are tied in with early repayment charges if you want to switch during the first two years of the product. So, a great looking deal, but a bit of a gamble.

Besides the HSBC mortgage, there are plenty of other attractive variable deals to consider:

Lender	Term	Rate	LTV	Fee	Early Repayment Charge
Alliance & Leicester	Two years	1.84% (Tracks Bank Base Rate plus 1.34%)	70%	2% of the advance	2% of sum repaid
Cheltenham & Gloucester	Variable until 31/05/12	2.29% (Tracks Bank Base Rate plus 1.79%)	75%	£99 plus 3% of the advance	3%/2% of sum repaid
First Direct	Lifetime tracker	2.39% (Tracks Bank Base Rate plus 1.89%)	65%	£499	£149
Earl Shilton	Discounted variable for 30 months	2.45% (Tracks lender’s SVR minus 2.50%)	75%	£599	2% of mortgage advance
HSBC	Lifetime tracker	2.49% (Tracks Bank Base Rate plus 1.99%)	75%	£999	N/A

Search for the best mortgage deal for you using lovemoney.com's powerful mortgage search engine

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.